Piketty questions on Australian Inequality

The French economists Thomas Piketty recently published a long-prepared book on the growth of inequality in the Western World over the last few centuries. His main contention, as I see it, is that wealth inequality is rising rapidly again and that we are returning to 19th century levels of inherited inequality, complete with ‘upper class’ behaviour and dismissive attitudes towards the poor. His work finds an echo in this recent book by Andrew Leigh on Australian inequality that similarly notes the increase in inequality over the last few decades.

From a research point of view, the main questions Piketty’s views raise for Australian economic scholars who are worried about inequality, are:

How do the super-rich in Australia actually make their money? Did they make it ‘on merit’ by inventing new techniques, or did they make their money by ‘grabbing it’ from the public purse by means of political patronage? The easiest way to answer this question is to go over the list of wealthiest Australians and look how they made their fortunes: by being innovative geniuses or by cosying up to political power and thus get away with stuff others did not. Pikketty very much points to the second source of wealth as a key mechanism for the explosion in the pay of super-managers, like bank-managers, whose pay is not truly linked to ‘performance’ but much more to what they manage to grab from their heavily-subsidised institutions. The same goes for CEOs in many major companies: they often did not build them up or add much to their productive value, but are in the position to grab the wealth created by these organisations anyway, no matter how incompetent they might be. In Australia there is an argument to be made for run-away ‘political rent-seeking’ as the prime cause of increasing inequality, but more extensive data on this point is needed.

What institutions and tax arrangements would actually work to reduce the importance of political patronage if that is indeed the main cause of the rising inequality? Australia, like much of the Western world, already has quite a few institutions dedicated to fight the abuse of (market) power, such as the ACCC and the many public utilities regulators, but it might be the case that we are nevertheless in a period of reduced vigilance because the nature of the economic system has changed. The ‘old institutions’ that worried about abuse of power in manufacturing and public utilities might not be so relevant for an economy in which over 70% is service based, meaning one needs to think about what institutions are appropriate for the more murky world of property development, education, and financial services, in which government regulation is both inevitable and creates tremendous opportunities for rent-seeking. The recent proposal in Queensland to prevent the Crime and Misconduct Commission from looking into political misconduct, undoing the key part of the Fitzgerald reforms following an earlier period of rampant political corruption in Queensland, is in that sense a clear move backwards.

How detrimental is inequality based on patronage for the wellbeing of the vast majority of Australian? Does it lead to a culture of compliant acceptance of the majority with a low station in life and low opportunities for their children too; or does it not matter much because even the poorest still get a pretty decent life? Can Australia as a small country ignore the World-wide effects and opportunistically base its economy on catering for the whims of the super-rich within the Asia-Pacific region, effectively making a world-wide change work for us? Those of us who are not super-rich themselves then can be their educators, cleaners, plumbers, gardeners, nail polishers, call-girls, security guards, and superannuation consultants. Somewhat our current trajectory.

I merely have strong suspicions on these research questions, no evidence that would convince a reasonable skeptic. Anyone who already thinks they have an educated answer to these questions should thus share their wisdom in the comment thread!

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11 Responses to "Piketty questions on Australian Inequality"

The first issue is to define “super rich”. Personally I would not describe bank managers as super rich but would consider Gena Reinhart as super rich. Of course there is a huge spectrum in between. And what about coparing average wage earners in Australia with average wage earners in Bangladesh? Are the former comparatively super rich? Personally I think Piketty is about dogma rather than equality.

Wealth inequality in Australia does not bother you then? I will admit, it bothers me. I have not read the whole of Piketty, so am not going to defend him on every point, but his basic contention that inequality is on the increase and that much of this is unrelated to ‘productivity’ concurs with a lot of other research. It heralds a real change and it is a valid question whether it is a change we want.

Steven Kaplan and Joshua Rauh’s “It’s the Market: The Broad-Based Rise in the Return to Top Talent” Journal of Economic Perspectives 2013 found that:
• Rising inequality is due to technical changes that allow highly talented individuals or “superstars” to manage or perform on a much larger scale.
• These superstars can now apply their talents to greater pools of resources and reach larger numbers of people and markets at home and abroad. They thus became more productive, and higher paid.
• Those in the Forbes 400 richest are less likely to have inherited their wealth or grown-up wealthy.
• Today’s rich are working rich who accessed education while young and then applied their natural talents and acquired skills to the most scalable industries such as ICT, finance, entertainment, sport and mass retailing.
• The U.S. evidence on income and wealth shares for the top 1% is most consistent with a “superstar” explanation. This U.S. evidence is less consistent with the gains in earnings of the top 1 percent coming from greater managerial power over the determination of their own pay in the corporate world or changes in social norms about what managers could earn.

the most striking difference between the wealthiest individuals in the US and around the world is that the share of non-US billionaires who grew up without any wealth at all has risen from under 30% in 1987 to over 50% in 2012.

McCloskey likes to make the point that we most we are all descendants of peasants. That must be the case that given that 95% of people worked the land a couple of hundred years ago.

The main exception appears to be progressive ideal Sweden where 10 to 20% of the rich and the prime ministers too are of nobel decent.

the share of the richest Swedes who inherited their wealth is around, 2/3 with 1/3 being entrepreneurs, while in the United States it was 1/3 of the wealthiest inherited their wealth while around 2/3 are entrepreneurs.